May 23, 2024

Business Recovery or Closure – how to decide which option is best for your insolvent company.

Finding out your company is insolvent is seldom a pleasant experience, but the worst thing you can do is bury your head in the sand and hope that the problem will go away. Doing this often leads to the issues worsening.  

Depending on your company’s situation, it may have multiple options available, which can make choosing the right one even more challenging.  

This guide will explore some of your options and help you decide which option would be best for you and your company. 

Please remember this guide is not a substitute for tailored advice. If you’re worried your company is insolvent, contact a licensed insolvency practitioner who can advise on your specific circumstances.  

The core business is viable, but the company cannot repay its debts. 

Sometimes, a company will have a viable core business model, but the company itself has amassed an unmanageable amount of debt. If these debts could be repaid or written off, then the company could continue trading without issue. 

Possible solution: Formal repayment arrangement. 

Depending on the company’s specific situation, it may be eligible for a Company Voluntary Arrangement (CVA). These are formal repayment arrangements wherein the insolvent company repays a portion of its debts at a monthly rate tailored to its affordability. 

The company has deeper-rooted problems, or parts of it are unprofitable. 

Sometimes, a company will have more substantial, deeper-rooted issues, which could make repaying the debts unfeasible as the sole method of relief. Creditor pressure may be severe, making continued operations difficult, or the company may require breathing space to formulate a plan, or restructuring to return it to a viable state. 

Possible solution: Administration. 

Placing the company in administration protects the company from creditor pressure while the insolvency practitioner investigates the company and its financial position. During this time, they will outline a plan to restructure or sell the company and its assets.  

Administration may be suitable if realising company property or assets could be used to make distributions to secured or preferential creditors, the process would achieve better results for creditors than if the company was liquidated first, or if the company could be rescued as a going concern. 

Creditor pressure is unbearable, and recovery is unlikely. 

Despite the directors’ best efforts, it isn’t always possible to save a company. It might suffer with minimal cash flow, creditors taking legal action, or debts at such a level that repaying in instalments or restructuring alone wouldn’t be feasible. 

If you decide to put the company to bed, you might think of dissolving the company, striking it off the Register of Companies at Companies House. Dissolution, however, is only intended for solvent companies. Creditors will likely object to attempts to dissolve an insolvent company. They can do so for six years after the dissolution, and have the company restored. 

Possible solution: Voluntary Liquidation. 

Rather than chancing a dissolution being rejected, you would be better off putting the company into the appropriate solution from the start. Often, this is a Creditors Voluntary Liquidation (CVL). This formal, legally binding process will see the company closed in an orderly manner. All unsecured debts are written off, leases cancelled, and staff made redundant, with the liquidators dealing with the creditors. 

Upon the liquidation’s completion, the company ceases to exist, leaving the directors free to walk away and start afresh. Depending on the company’s circumstances, it might be possible to continue the business through a newly formed company, potentially using some of the assets and staff of the old one. This is called a pre-pack, and isn’t always possible. You can discuss its viability with an insolvency practitioner. 

It’s easy to see liquidation as something of a defeat, but if the company is in such a situation, closing voluntarily can be the best option. Leaving it any longer can result in the creditors forcing the company into compulsory liquidation via a winding-up petition, wherein directors will have even less control of the process. 

To summarise 

If your company faces insolvency, it’s important you act quickly to make sure you get the option best suited for your company’s circumstances. If the core business is viable but its debts have become unmanageable, repaying in instalments through a formal repayment arrangement could be a viable solution. If the company has deeper-rooted issues or breathing space is required to facilitate a better solution, the company may be a candidate for administration. Alternatively, if the company’s debts are of such a level that recovery is unfeasible, voluntarily liquidating the company is often preferable to having the creditors force the company into compulsory liquidation. 

Whatever your company’s circumstances, don’t waste time and hope that the problem will go away. Take decisive action and consult a licensed insolvency practitioner who can assess your company’s circumstances and point you in the right direction.